How Low Can Arcos Dorados Go?

Shares of Arcos Dorados (NYSE: ARCO  ) hit a 52-week low on Thursday. Let's take a look at how the company got there and see whether cloudy skies remain in the forecast.

How it got here
Normally there's a viable reason that a company is trading at a new 52-week low -- in this case, your guess is just as good as mine.

Arcos Dorados, which is the largest McDonald's (NYSE: MCD  ) franchisee in Latin America, reported a 17.7% increase in sales based on constant currency for fiscal 2011, with an even more impressive 13.7% boost in comparable-store sales. Over the course of the year, Arcos opened an additional 101 restaurants and net income increased by 9% (based in U.S. dollars) as the company marked its fourth straight year of sales expansion.

Again, it's hard to argue against figures like that when Arcos' U.S. equivalent restaurants have been growing at a far slower pace. Burger King is a mess, having lost the No. 2 U.S. hamburger sales ranking to Wendy's (NYSE: WEN  ) for the first time in 40 years. Even Wendy's isn't the growth engine it once was, with an aggressive advertising campaign only managing to get the company on target for 4% international same-store sales growth in 2012. Jack in the Box (Nasdaq: JACK  ) has benefited from a revamp of its menu and a remodeling of many of its locations, but its same-store growth of 3.6% in its latest quarter still doesn't come close to Arcos' double-digit growth in 2011.

How it stacks up
Let's see how Arcos Dorados stacks up next to its peers.

ARCO Chart

ARCO data by YCharts

If I thought I was confused before, I'm now really confused. Let's take a closer look at some company metrics.

 

Company

Price/ Book

Price/ Cash Flow

Forward P/E

Dividend Yield

Arcos Dorados 5.1 13.6 16.5 1.4%
Wendy's 0.9 7.9 21 1.7%
Jack in the Box 2.4 10.3 14.7 0%
Yum! Brands (NYSE: YUM  ) 15.1 15.7 18.5 1.6%

Sources: Morningstar, Yahoo! Finance. Yields are projected.

Looks can be deceiving if you just quickly glance at these figures. Wendy's may appear like a genuine value trading for less than book, but the company hasn't produced anything more than a minuscule profit in years as its U.S. operations have struggled. Jack in the Box has shown strong growth recently, but it lacks a dividend and is generally too small to steal significant market share. Yum! Brands, known better as the owner and operator of Pizza Hut, KFC, and Taco Bell, might appear overvalued by these metrics, but relative to Wendy's and Jack in the Box, it's shown the most steady growth rates. Still, it boasts a higher price-to-book and price-to-cash-flow compared with Arcos Dorados.

What's next
Now for the real question: What's next for Arcos Dorados? That question really depends on whether it can execute on its expansion strategy and continue to fend of rising input costs. Based on what I've seen so far from the company, it has been executing on its plans flawlessly.

Our very own CAPS community gives the company a highly coveted five-star rating, with an almost eye-popping 98.5% of members expecting it to outperform. I've also made a CAPScall of outperform on Arcos Dorados, with the selection pending as of this writing.

I am completely stunned as to why Arcos is trading at a 52-week low. It's true that as a franchiser of McDonald's restaurants that Arcos needs to part with some of its income each year as fees, so it will never live up to the profit expectations of its parent company, McDonald's. But it should also be noted that the sheer scope of growth in Latin American markets when coupled with the Golden Arches' globally recognized logo should propel Arcos forward. Arcos has shown amazing growth and pays out a fairly decent dividend to boot. To me, it's a no-brainer buy at these levels.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Arcos Dorados. Motley Fool newsletter services have recommended buying shares of Arcos Dorados, McDonald's, and Yum! Brands. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On May 07, 2012, at 8:42 AM, bourse wrote:

    ...the same happened to Pricesmart (PSMT).

    Investors needed a couple of quarters to understand the company!

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